Question

You are a testifying expert in a commercial damages case involving a breach of contract. Had the contract not been breached, the injured part would have constructed a new manufacturing facility to produce the goods related to the contract. Will you likely measure damages as lost income or lost cash flow?

Answer 1

Answer:-

In case, where the non-breaching party is a manufacturer the damages suffered because of the breach are equal to the lost income. In general, damages for the buyer's breach are computed by reducing the cost of manufacture/COGS from the contract price which equals the lost income.

Based on taking direct costing concept, in case of breach of Contract, all damages equals to loss of profit/income. Based on below example it will clearly portray:-

No of Contract - 5 , Price per Contract - $ 20, Variable Cost - $ 5 per contract and Fixed Cost - $10

Gross Sales Revenue $100

-Variable Costs (cost of manufacture) -25

Contribution Margin 75

-Fixed Costs (period costs) -10

Net Income $65

If one of five would be breached Net Income will be $ 50.

So, based on above, Had the contract not been breached and used in other construction work, all damages should be assigned/recognized as Loss of Income/profit.